SC upholds states' power to levy additional tax on sales tax under pre-GST regime

A seven-judge Constitution Bench found no reason to revisit S. Kodar judgment, settling a reference pending since 1998.

NEW DELHI: The Supreme Court on Wednesday reaffirmed states’ power to impose an additional tax, surcharge or cess calculated on an existing sales tax, settling a legal question that had remained unresolved for nearly three decades. A seven-judge Constitution Bench upheld a 1974 judgment that recognized such levies as an exercise of states’ taxation powers under the pre-GST regime.

A bench headed by Chief Justice Surya Kant held that an additional levy calculated as a percentage of the sales tax payable by a dealer amounts to an increase in the sales-tax rate. It therefore falls within Entry 54 of the State List, which empowered states to tax the sale or purchase of goods, other than inter-state sales, before the introduction of the goods and services tax (GST) in 2017.

The ruling reaffirms the Supreme Court’s 1974 decision in S. Kodar vs State of Kerala, which upheld an additional sales tax imposed by Tamil Nadu on dealers whose annual turnover exceeded specified limits. The court had held that the levy, calculated as a percentage of sales tax payable, was an increase in the sales-tax rate rather than a tax on dealers’ income.

Entry 54 provided the constitutional basis for states’ sales-tax powers before GST. Following the introduction of GST, states have retained the power to tax certain products outside its ambit, including petrol, diesel, crude oil, natural gas, aviation turbine fuel and alcoholic liquor for human consumption.

In a concurring judgment, Justice K.V. Viswanathan said Kodar was correctly decided and remained good law, requiring no reconsideration. The bench also held that there was no conflict between Kodar and the Supreme Court’s 1983 judgment in Hoechst Pharmaceuticals, which had upheld a similar surcharge on sales tax.

The court observed that the broader reference had become academic following the introduction of GST in 2017 and subsequent changes to the constitutional provisions and state taxation laws.

The Centre, represented by Solicitor General Tushar Mehta, made a similar argument during the hearings, saying GST had replaced the earlier sales-tax framework. It also indicated that only a limited number of pending cases could be affected by the ruling.

The bench also comprised Justices K.V. Viswanathan, S.V.N. Bhatti, Joymalya Bagchi, N.V. Anjaria, Arun Palli and V. Mohana.

A question pending since 1998

Although the Supreme Court had upheld states’ power to impose additional levies on sales tax in Kodar and subsequent judgments, uncertainty emerged following its 1990 ruling in India Cements vs State of Tamil Nadu. That case concerned a cess imposed on mining royalty, which the court struck down, raising questions about the limits of states’ taxation powers.

The issue resurfaced in 1994 in Arjun Flour Mills vs State of Orissa, which concerned the state’s power to impose an additional tax on dealers based on their annual turnover under the Orissa Sales Tax Act, 1947.

In 1998, the Supreme Court referred the matter to a larger bench, citing an apparent conflict between earlier judgments, particularly Kodar (1974) and India Cements (1990).

Wednesday’s ruling settles that reference by reaffirming Kodar as good law and holding that the judgment does not require reconsideration.

About the Author

Krishna Yadav is a Senior Correspondent at Mint, based in New Delhi, and part of the corporate bureau. He joined the newsroom as a trainee in 2023 and quickly grew into his current role. He writes on legal and regulatory developments in corporate India, with a focus on insolvency, taxation, company law, and policy. His reporting includes tracking and breaking key legal stories from the Supreme Court, Delhi High Court, NCLT, and NCLAT.<br><br>With a background in law, Krishna is known for simplifying complex legal developments into clear, accessible stories for readers. His work focuses on trends in corporate law and policy that affect businesses. This ranges from explaining tax disputes—like whether coconut hair oil is edible—to writing on why celebrities are seeking personal rights protection. He closely tracks India’s insolvency system, covering issues such as creditor losses, gaps in the process, and challenges in how the framework works in practice.<br><br>Krishna also tracks developments within law firms—covering hiring trends, how firms help companies navigate global challenges, and how the legal industry is adapting to artificial intelligence. Beyond legal reporting, he has written long-form pieces, including on-ground coverage of the 2024 general elections, capturing the scale and logistics of polling across India.<br><br>Outside work, he enjoys travelling, exploring new places, and reading about geopolitics and history.